“Resetting the Urban Network,” G. Michaels & F. Rauch (2017)

Cities have two important properties: they are enormously consequential for people’s economic prosperity, and they are very sticky. That stickiness is twofold: cities do not change their shape rapidly in response to changing economic or technological opportunities (consider, e.g., Hornbeck and Keniston on the positive effects of the Great Fire of Boston), and people are hesitant to leave their existing non-economic social network (Deryagina et al show that Katrina victims, a third of whom never return to New Orleans, are materially better off as soon as three years after the hurricane, earning more and living in less expensive cities; Shoag and Carollo find that Japanese-Americans randomly placed in internment camps in poor areas during World War 2 see lower incomes and children’s educational outcomes even many years later).

A lot of recent work in urban economics suggests that the stickiness of cities is getting worse, locking path dependent effects in with even more vigor. A tour-de-force by Shoag and Ganong documents that income convergence across cities in the US has slowed since the 1970s, that this only happened in cities with restrictive zoning rules, and that the primary effect has been that as land use restrictions make housing prices elastic to income, working class folks no longer move from poor to rich cities because the cost of housing makes such a move undesirable. Indeed, they suggest a substantial part of growing income inequality, in line with work by Matt Rognlie and others, is due to the fact that owners of land have used political means to capitalize productivity gains into their existing, tax-advantaged asset.

Now, one part of urban stickiness over time may simply be reflecting that certain locations are very productive, that they have a large and valuable installed base of tangible and intangible assets that make their city run well, and hence we shouldn’t be surprised to see cities retain their prominence and nature over time. So today, let’s discuss a new paper by Michaels and Rauch which uses a fantastic historical case to investigate this debate: the rise and fall of the Roman Empire.

The Romans famously conquered Gaul – today’s France – under Caesar, and Britain in stages up through Hadrian (and yes, Mary Beard’s SPQR is worthwhile summer reading; the fact that Nassim Taleb and her do not get along makes it even more self-recommending!). Roman cities popped up across these regions, until the 5th century invasions wiped out Roman control. In Britain, for all practical purposes the entire economic network faded away: cities hollowed out, trade came to a stop, and imports from outside Britain and Roman coin are near nonexistent in the archaeological record for the next century and a half. In France, the network was not so cleanly broken, with Christian bishoprics rising in many of the old Roman towns.

Here is the amazing fact: today, 16 of France’s 20 largest cities are located on or near a Roman town, while only 2 of Britain’s 20 largest are. This difference existed even back in the Middle Ages. So who cares? Well, Britain’s cities in the middle ages are two and a half times more likely to have coastal access than France’s cities, so that in 1700, when sea trade was hugely important, 56% of urban French lived in towns with sea access while 87% of urban Brits did. This is even though, in both countries, cities with sea access grew faster and huge sums of money were put into building artificial canals. Even at a very local level, the France/Britain distinction holds: when Roman cities were within 25km of the ocean or a navigable river, they tended not to move in France, while in Britain they tended to reappear nearer to the water. The fundamental factor for the shift in both places was that developments in shipbuilding in the early middle ages made the sea much more suitable for trade and military transport than the famous Roman Roads which previously played that role.

Now the question, of course, is what drove the path dependence: why didn’t the French simply move to better locations? We know, as in Ganong and Shoag’s paper above, that in the absence of legal restrictions, people move toward more productive places. Indeed, there is a lot of hostility to the idea of path dependence more generally. Consider, for example, the case of the typewriter, which “famously” has its QWERTY form because of an idiosyncracy in the very early days of the typewriter. QWERTY is said to be much less efficient than alternative key layouts like Dvorak. Liebowitz and Margolis put this myth to bed: not only is QWERTY fairly efficient (you can think much faster than you can type for any reasonable key layout), but typewriting companies spent huge amounts of money on training schools and other mechanisms to get secretaries to switch toward the companies’ preferred keyboards. That is, while it can be true that what happened in the past matters, it is also true that there are many ways to coordinate people to shift to a more efficient path if a suitable large productivity improvement exists.

With cities, coordinating on the new productive location is harder. In France, Michaels and Rauch suggest that bishops and the church began playing the role of a provider of public goods, and that the continued provision of public goods in certain formerly-Roman cities led them to grow faster than they otherwise would have. Indeed, Roman cities in France with no bishop show a very similar pattern to Roman cities in Britain: general decline. That sunk costs and non-economic institutional persistence can lead to multiple steady states in urban geography, some of which are strictly worse, has been suggested in smaller scale studies (e.g., Redding et al RESTAT 2011 on Germany’s shift from Berlin to Frankfurt, or the historical work of Engerman and Sokoloff).

I loved this case study, and appreciate the deep dive into history that collecting data on urban locations over this period required. But the implications of this literature broadly are very worrying. Much of the developed world has, over the past forty years, pursued development policies that are very favorable to existing landowners. This has led to stickiness which makes path dependence more important, and reallocation toward more productive uses less likely, both because cities cannot shift their geographic nature and because people can’t move to cities that become more productive. We ought not artificially wind up like Dijon and Chartres in the middle ages, locking our population into locations better suited for the economy of the distant past.

2016 working paper (RePEc IDEAS). Article is forthcoming in Economic Journal. With incredible timing, Michaels and Rauch, alongside two other coauthors, have another working paper called Flooded Cities. Essentially, looking across the globe, there are frequent very damaging floods, occurring every 20 years or so in low-lying areas of cities. And yet, as long as those areas are long settled, people and economic activity simply return to those areas after a flood. Note this is true even in countries without US-style flood insurance programs. The implication is that the stickiness of urban networks, amenities, and so on tends to be very strong, and if anything encouraged by development agencies and governments, yet this stickiness means that we wind up with many urban neighborhoods, and many cities, located in places that are quite dangerous for their residents without any countervailing economic benefit. You will see their paper in action over the next few years: despite some neighborhoods flooding three times in three years, one can bet with confidence that population and economic activity will remain on the floodplains of Houston’s bayou. (And in the meanwhile, ignoring our worries about future economic efficiency, I wish only the best for a safe and quick recovery to friends and colleagues down in Houston!)